There is nothing “loopy” about a fair contribution from the big banks – ask the IMF

Whilst I have the upmost respect for Tom Ellison and acknowledge he makes some good points about potential policies ( Loopy economics from the Greens, TT here ), he misses and misrepresents the key reasons behind the Greens proposed levy on the big banks. It is not our “loopy idea”, rather one we have borrowed from the International Monetary Fund (IMF).

The IMF has recommended charging a fee equivalent to 70% of the funding cost advantage enjoyed by systemic institutions. ( IMF, Australia: Addressing Systemic Risk through Higher Loss Absorbency – Technical Note, Nov 2012 – http://www.imf.org/external/pubs/cat/longres.aspx?sk=40113.0 ) The logic is simple, taxpayers through governments provide guarantees to the big banks (example we guaranteed during the GFC to bail them out if they fail) this gives them a competitive advantage (in wholesale funding) which helps them make profits (through increased margins). These profits should be given back to taxpayers – via a levy (roughly equal to the increased margins).

I don’t think many Australians would support taxpayer assistance that helps the banks make more profits – quite the opposite. Its not a “loopy” Greens economic policy – it’s fair and sensible policy.

The Australian Greens outlined this proposal back in March for a ‘Public Support Levy’ on the big four banks in return for the implicit “too-big-to-fail” policy of the government that underwrites their activities.

The 20 basis points levy on bank assets in excess of $100 billion has been costed by the Parliamentary Budget Office and would raise $11 billion over the forward estimates. The levy mirrors similar levies in Europe that raise on average approximately 0.2% of GDP and is based on International Monetary Fund proposals.

For many years, especially since the GFC, the big four banks have benefited from an implicit ‘too big to fail’ policy, and under Labor, the big 4 banks are making more from mortgages, dominating more of the market and enjoying record profits.

The Greens proposed levy follows the advice of the IMF and recognises that it is time the big four banks paid a fair contribution for the public support they receive. Otherwise the big four banks are taking all of the profits while the taxpayers are wearing all of the risk. This moderate levy of 0.2 per cent is in line with IMF proposals and is a fair contribution from the banks for the support they are provided by taxpayer

By limiting the levy to those big 4 banks that are truly ‘too big to fail’, the levy won’t be passed on to consumers as the big banks will face competition from smaller banks who aren’t paying the levy. In this way the levy would improve bank competition, going some way to equalising the wholesale funding advantage government policy gives systemic banks over smaller institutions.

We encourage debate in this important issue, and are happy to receive constructive criticism, but Tom Ellison is wrong and misinformed about the Greens proposals to make the big 4 banks pay their fair share.

IMF reference: IMF, Australia: Addressing Systemic Risk through Higher Loss Absorbency – Technical Note, Nov 2012 – http://www.imf.org/external/pubs/cat/longres.aspx?sk=40113.0